By Ahmad Lutfi Abdull Mutalip (Managing Partner/ Head of Global Financial Services and Islamic Banking Practice Group) and Muhammad Abbad Abd Wahid (Legal Executive)

Introduction

On 30 June 2013, the Financial Services Act 2013 (“FSA”) and the Islamic Financial Services Act 2013 (“IFSA”) (collectively referred to as “Acts”) have come into effect by substituting and repealing the Banking and Financial Institutions Act 1989, the Insurance Act 1996, the Payment Systems Act 2003, the Exchange Control Act 1953, the Islamic Banking Act 1983 and the Takaful Act 1984. The objectives of the Acts are to provide Bank Negara Malaysia/ Central Bank of Malaysia (“BNM”) with greater powers to counter future risks to financial stability in the financial sector, increase consumer protection, promote competition in the broader financial services sector and step forwards towards global trends in financial regulations.

Scope and ambit

The Acts have broadened some scope and ambit mainly in the definitions of “authorised person” and “registered person”. These Acts further outline another category, which is “financial intermediation”. The activities of financial intermediation are listed under Section 211 of the FSA and Section 222 of the IFSA.

Licensing

All persons undertaking banking business, investment banking or insurance business are required to hold valid licenses granted by Minister of Finance (“Minister”). Businesses such as financial advisory, money-broking and insurance broking will only need to obtain approvals from BNM.

Every authorized person is required to maintain at all times a minimum capital of funds or a surplus of assets over liabilities during the course of carrying on its authorized business.

Share interest

The Acts allow a person holding existing interest in a licensed person to increase its shareholding in that licensed person without having to seek prior approval if such increase does not exceed a multiple of 5% and together not exceeding the aggregate of 10%.

As for disposing of shares, the requirement to seek approval of the Minister or BNM no longer applies, except in cases where the shareholder proposes to dispose shares which results in the shareholder ceasing to have control over the licensed person.

Financial holding company

Any company must first obtain a written approval of the Minister and require an approval by BNM if the company intends to become a Financial Holding Company (“FHC”) which holds more than 50% shares in a licensed person.

FHC of a licensed person is not allowed to operate any business except financial services or other services relating to financial services and must abide by all Prudential Requirements set out under Part V of the FSA and Part VI of the IFSA.

Sharia governance

A key difference between the FSA and the IFSA is the introduction of a new Part IV of the IFSA to strengthen Shariah governance whereby Islamic financial institutions shall ensure end to end sharia compliance with regards their policies, procedures and operations.

Corporate governance

A licensed person is required to obtain the approval of BNM for the appointment, election, reappointment and re-election of the chairman, director, chief executive officer or a senior officer, and a notification to BNM of the appointment, election, reappointment and re-election of the chairman, director, chief executive officer or a senior officer is sufficient in the case of an approved person or an operator of a designated payment systems.

The Acts enhance the duties of directors and place more stringent requirements on transparency on the part of directors of licensed persons and the holding companies.

Insurance/Takaful

Under the FSA, insurers who hold composite licenses are prohibited from operating both general and life insurance businesses. Similarly under the IFSA, the takaful operators who hold composite licenses are prohibited from operating both general and family takaful business. However, licensed professional reinsurers/retakaful operators are exempted from this prohibition. BNM has granted a grace period (of up to 5 years or as will be specified by the Minister, on recommendation by BNM) for composite insurers/takaful operators to de-merge into separate entities.

Payment systems

The Acts streamline the regulations and supervisions of licensed and approved persons, thus the criteria by which any application to carry on payment systems business would be assessed similarly as an application to carry on licensed business. An applicant would be assessed upon the factors listed in Schedule 5 in the Acts.

Exchange control

According to the Acts, no person shall undertake or engage in any transaction set out in Schedule 14, unless he has obtained a written approval from BNM. This will include any proposed transaction falling within borrowing or lending of Ringgit Malaysia between non-residents, retaining or using Ringgit Malaysia by a non-resident, giving or obtaining any guarantee in respect of any debt or liability, importing into or exporting from Malaysia in Ringgit Malaysia, foreign currency, gold or other precious metals.

Powers of Bank Negara Malaysia

Under the Acts, BNM is empowered to assume control over the whole or part of business, affairs or property of the financial institution, to manage it or appoint any person to manage it on behalf of BNM and to designate a bridge institution when certain circumstances arise.